Strong GDP Number Doesn't Faze Investors Ahead of Next Week's Fed Decision

(Thursday Market Open) The Federal Reserve’s struggles to harness a galloping economy continue, judging from today’s Q4 Gross Domestic Product (GDP) data and the latest weekly read on initial jobless claims.

GDP rose 2.9% in Q4, above the average analyst estimate of 2.6% but a bit shy of 3.2% in Q3. Meanwhile, initial jobless claims plunged to a historically low 186,000, down from a revised 192,000 the prior week.

Stock index futures had been trading higher before the data, which came out an hour before the open. They initially came off their highs after the data release but then accelerated off of earlier gains. Interestingly, it’s the “growth” stocks that are leading, with Nasdaq 100® (NDX) futures up more than 1%. WTI crude oil (/CL) also leapt.

Other economic numbers out this morning also backed up views of economic vigor, including a 5.6% rise in December durable orders following a 1.7% drop in that category the previous month.

Until recently, investors tended to dread “good” economic numbers and welcome bad ones, hoping slower growth would cause the Fed to pull back on future rate hikes. Lately, that dynamic has changed a bit, especially with last week’s selloff following a dismal December Retail Sales report. If we’re back to “good is good” and “bad is bad,” perhaps this strong GDP data might get a welcome from Wall Street.

GDP coming in solid was a good sign for anyone fearing recession, arguably. It suggests we have a better base to build on if the economy slows.

As for the Fed, the CME FedWatch Tool still shows nearly a 99% probability of a 25-basis point rate hike at the Federal Open Market Committee (FOMC) meeting next week. Odds for another quarter-point hike in March rose to 81% this morning, from 75% a week ago, while chances of the Fed pausing in March fell to 17% today from 22% a week ago.

Morning rush

• The 10-year Treasury yield (TNX) added 3 basis points to 3.49%.
• The U.S. Dollar Index ($DXY) was steady at 101.8.
• Cboe Volatility Index® (VIX) futures rose slightly to 19.25.
• WTI Crude Oil (/CL) climbed 1.65% to $81.49 per barrel.

If you haven’t been watching Treasury auctions, now’s a good time to start. There’s been strong demand this week, perhaps a sign that investors think rates are finally going to be headed down.

Earnings scorecard

Big tech dominated yesterday afternoon’s earnings picture, highlighted by IBM (IBM) and Tesla TSLA.

Tesla (TSLA) jumped more than 7% in premarket trading after its Q4 numbers Wednesday showed record revenue and beat analysts’ projections on earnings. After losing more than 60% of its share value in 2022 due to supply chain hiccups and other distractions, TSLA shares were already up more than 33.6% for the year by yesterday’s close.

Revenue came in slightly below the Wall Street’s expectations and earnings per share (EPS) were slightly above, while the company’s outlook for 2023 production of 1.8 million units was shy of the 1.9 million consensus. The company still faces the same challenges, especially after Q4 deliveries missed analysts’ expectations.

TSLA recently announced a big price cut for its vehicles, which theoretically cuts into profit margin. Automotive gross margin fell to 25.9% in Q4 even though average selling prices rose year over year. That metric (margin) is probably going to be closely watched this year, though analysts say TSLA is in a position where it has some room to trim margin. It’s also going to be important to watch how TSLA competes against new entries in the electric vehicle market.

IBM: Big Blue beat the street with its revenue and matched analysts’ estimates on EPS. The skid in shares after it reported could’ve reflected profit taking because IBM has outperformed the rest of the tech sector over the last year. It was hard to find anything not to like in the report itself, though IBM’s guidance for 2023 free cash flow came in a bit below analysts’ estimates. That might’ve been another reason shares went into the red.

In for a landing

Airline stocks had a somewhat rough Q4 earnings takeoff early today, but among most carriers reporting so far, post-pandemic wanderlust has been a powerful tailwind. 

American Airlines AAL: Shares got a 2% lift in premarket trading after the airline reported better-than- expected earnings per share (EPS) and matched the street’s revenue expectations. Investors already had a hint AAL enjoyed a nice quarter when it raised projections earlier this month. For all of 2022, AAL recorded the highest annual revenue in its history and said there’s been some progress on longer-term financial issues too. The company said it prepaid a $1.2 billion term loan in Q4, addressing the most significant 2023 maturity, and continues to target $15 billion in total debt reduction by the end of 2025.

Southwest LUV had a rough landing in the premarket after reporting a $220 million Q4 loss related to its widely watched performance over the holidays. Share were down over 3% before the open as the airline reported an increase in January cancellations and slower passenger bookings. In case you missed it, LUV’s experience with severe weather and staff turmoil led to more than 16,700 canceled flights and initial estimates of up to $825 million in added costs during the industry’s peak Christmas-New Year’s travel period. The airline still expects profitability this year, but the Q4 loss was worse than analysts had expected. On top of all that, the U.S. Department of Transportation announced yesterday that it is in the early stages of an investigation into Southwest’s situation during the holidays. 

Alaska Air ALK The airline reported EPS slightly above expectations and revenue that came just a whisker short of the Street’s consensus. Shares were down slightly in premarket trading.

Up next

Intel INTC will have the semiconductor world front and center in this afternoon’s earnings reports. Analysts expect the chip maker to report EPS of $0.21 and revenue of $14.49 billion, according to FactSet. This follows a disappointing Q4 forecast back in October. INTC chips are used in many personal computers, and analysts say the PC market continues to struggle.

Speaking of PCs, yesterday was the 40th anniversary of the Apple Macintosh computer, according to technology publisher Digital Trends. That should hammer home some memories if you’re the right age.

Reviewing the market minutes

Resilient isn’t a word many would’ve associated with Wall Street in 2022. So far in 2023, though, it starts coming to mind.

On Wednesday, for the second day in a row, the major indexes stood their ground after heavy early selling and forged their way back to avoid any serious losses. In fact, the Dow Jones Industrial Average® ($DJI) extended its win streak to four sessions. The Nasdaq Composite® ($COMP), which was down 2% at its morning trough Wednesday, clawed back and finished just 0.18% lower.

The S&P 500® index (SPX) did something hardly ever seen these days, though it was slightly more common decades ago when indexes still added up to the hundreds rather than the thousands. It closed on the same tick as it had the day before, at 4,016, give or take a few-hundredths of a percentage point.

The flatness extended to fixed income, where the 10-year Treasury yield (TNX) fell just one basis point to 3.45% on Wednesday, still near the lower end of its recent range.

This featureless trading where indexes chop around before coming back to basically where they started might continue into next week as traders prepare for the FOMC rate decision Wednesday. There doesn’t seem to be a lot of appetite in the market for dramatic moves until we know more about the Fed’s point of view. The February 3 Nonfarm Payrolls report, along with a host of tech earnings next week, could also explain why things appear on hold for now.

Here’s how the major indexes performed Wednesday:

• The $DJI rose 9 points to 33,743.
• The $COMP) fell 0.18% to 11,313.
• The Russell 2000® (RUT) gained 0.25% to 1,890.
• The SPX decreased 0.02% to 4,016.

Where the bulls are

In an interview with CNBC yesterday, Charles Schwab’s Chief Global Investment Strategist Jeffrey Kleintop expanded on what you’ll see in his latest Weekly Market Outlook | Charles Schwab—noting that European markets outperformed U.S. stocks last year and continued to so far this year. Kleintop believes a mild global recession began last year, and every time this happens, we see a reversal in the relative performance of U.S. and international stocks—whichever market was the leader becomes the laggard, and vice-versa.

Kleintop added that while U.S. S&P 500 Q4 earnings so far have fallen 3% year over year, earnings are up 10% year over year in Europe. And liquidity-driven tech stocks are no longer driving markets higher; instead, it’s stocks with higher dividend yields and lower price-to-cash-flow ratios that have been driving the markets within and across sectors, and those types of stocks are more prevalent outside the United States.

CHART OF THE DAY:  SEPARATE WAYS. Both the U.S. Dollar Index ($DXY—candlesticks) and WTI Crude Oil (/CL—purple line) are down sharply from six months ago. The difference is that crude has kicked up over the last month, while the dollar continues to sink. This could be a good sign of improvement in overseas economies, particularly China and Japan. The problem is a stronger dollar tends to lift crude prices, which could make the Fed’s inflation-fighting job more difficult. Data sources: ICE, CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Pause predicted: There’s not much mystery surrounding next week’s FOMC meeting. The CME FedWatch Tool puts the probability of a quarter-point rate hike at a solid 99%. But what about after that? FedWatch puts the odds of another quarter-point hike at the March 21 –22 Fed meeting at 81%. Not every analyst agrees, however. For instance, research firm CFRA said this week it expects February’s potential 25-basis-point hike to be the last before a “pause” that will continue through the rest of 2023.  

The PPI factor: A March pause would leave rates between 4.5% and 4.75%, meaning the Fed simply wouldn’t reach its terminal, or “peak,” projection for rates between 5% and 5.25% at some point in 2023. CFRA bases its “pause” thinking on the sharp decline in December’s Producer Price Index (PPI), which the firm said implies reduced inflation risk. Keep in mind that slowing PPI—which tracks the wholesale side of the economy—often suggests lighter consumer price growth down the road. 

Price data up next: Given the above, every piece of data through the March meeting should get an extra close look for how it could affect the Fed’s thinking. And few points of data are more influential than tomorrow’s December Personal Consumption Expenditures (PCE), the Fed’s preferred inflation metric that’s scheduled for release before Friday’s opening bell. Current consensus on Wall Street is for a flat headline PCE number and a 0.3% rise in core PCE, which strips out food and energy prices, according to research firm Briefing.com. In November, headline PCE rose 0.1% and core PCE was up 0.2%, so expectations for tomorrow don’t show much hope for a further slowdown in price growth. Within the data, check personal income and spending for December, which can provide insight into consumer health. Consensus is for a 0.2% rise in personal income and a 0.1% decline in personal spending during December, Briefing.com noted. It wouldn’t be surprising to see spending under pressure after that bearish Retail Sales report we got last week.

Notable calendar items

Jan. 27: December PCE Prices, Final January University of Michigan Consumer Sentiment, and expected earnings from American Express (AXP) and Chevron (CVX)

Jan. 30: Expected earnings from GE HealthCare (GEHC) and Philips (PHG)

Jan. 31: Start of FOMC meeting, January Chicago PMI, December Consumer Confidence, and expected earnings from ExxonMobil (XOM), General Motors (GM), Pfizer (PFE), McDonald’s (MCD), Caterpillar (CAT), and UPS (UPS)

Feb. 1: FOMC rate decision, December Construction Spending, January ISM Manufacturing, and expected earnings from Altria (MO), Meta (META), Peloton (PTON), and Waste Management (WM)

Feb. 2: December Factory Orders and expected earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL)

Feb. 3: January Nonfarm Payrolls and expected earnings from Sanofi (SNY) and Cigna (CI)

Feb. 6: Expected earnings from Cummins (CMI) and Tyson Foods (TSN)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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